BPPLAS guided for improved YoY and QoQ performance in 4QFY23, and it is hopeful of a better FY24. It is gaining market share overseas, especially in Europe with its nano stretch film, which should improve its product mix and enhance margins. We maintain our forecasts, TP of RM1.23 and MARKET PERFORM call.

We came away from a post-results engagement with BPPLAS feeling reassured of its long-term prospects. The key takeaways are as follows:

1. Gaining traction with nano stretch film. BPPLAS’s exports to Europe are rising, led by its higher-margin nano stretch film (thinner film yet better strength and performance). This is mainly driven by: (i) the rising demand for sustainable products, bolstered by positive response at an international fair in Europe held in May 2023, (ii) its cost competitiveness against its overseas peers, and (iii) its superior 67-layer nano stretch film machines, which offer better stretchability and economic efficiency, compared to 33-layer or 55-layer machines of its competitors. It is optimistic about securing more orders from both Europe and the USA. There has been active engagement with its distributors, including testing on product samples. In FY22, 57% of BPPLAS’s total sales came from Asia countries, followed by Malaysia (30%) and Others (13%), which include Europe and USA.

2. Capacity expansion on track. Its two new co-extrusion blown film machines are set to be commissioned by end-FY23, following the commissioning of its fifth machine last week and the sixth scheduled for the second half of Dec 2023 (see table on Page 2 for composition of its fleet of machines). These machines will be used to produce films catering to various applications, particularly in F&B packaging (e.g. sugar bags, flour bags, oil bags), lamination film, shrink film, stretch hood, etc. The primary market focus will be on the domestic market.

3. Adding printed film. BPPLAS plans to expand into printed film in FY24 primarily to target the F&B and hygiene sectors. The key rationale for this move is to expand its product portfolio, enabling it to offer an integrated solution to its customers. Printed film also fetches better margins.

4. Mitigating energy costs. Its current in-house solar system (equipped with a 1.1 MW capacity) will lower its energy bill by 2%- 3%. With full solar panel being installed across the plant roofs, its generation capacity will increase to 3.5 MW, which will then boost energy savings up to 8%. In addition, this helps BPPLAS to score points in terms of reducing carbon emissions.

Forecasts. Maintained.

We also maintain our TP of RM1.23 based on 9x FY24F PER, at a discount to the sector’s average historical forward PER of 13x, largely to reflect BPPLAS’ relatively smaller market capitalisation and thin share liquidity. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We like BPPLAS for its: (i) strong foothold in the SE Asia market which is expected to remain resilient despite global economic uncertainties, (ii) strong cash flows and balance sheet (a net cash position) that will enable it to weather downturns better, and (iii) long-term capacity expansion in high-margin premium stretch film and blown film products. However, its near-term prospects are weighed down by the global economic slowdown. Maintain MARKET PERFORM.

Risks to our call include: (i) volatility in resin prices, (ii) reduced demand for packaging materials due to an extended global economic slowdown, (iii) labour shortages, and (iv) rising input costs.

Source: Kenanga Research - 27 Nov 2023